India's government delivered a bold budget on Monday, boosting investment in healthcare and infrastructure and announcing plans to set up a company to manage stressed banks, as it battles its worst economic contraction in 70 years.
Amid high expectations for the budget for the coming financial year starting in April, finance minister Nirmala Sitharaman announced plans to double healthcare spending to 2.2 trillion rupees ($30 billion). She also announced a new 641bn rupee federal health scheme.
The government allotted 200bn rupees for the recapitalisation of state-run banks, as they continue to grapple with the burden of bad debt, as well as plans to establish a "bad bank" to oversee stressed lenders and non-performing assets.
Asia's third largest economy faces its deepest contraction since 1952 and businesses have pinned their hopes on the budget to propel the economy out of a recession and boost employment.
Leading up to her address on Monday, Ms Sitharaman described it as a "budget like never before".
Investors reacted positively to the government's announcements with the benchmark BSE Sensex gaining more than 4 per cent following the presentation of the budget.
"The finance minister presented a progressive budget, focused on achieving growth through capital investment, job creation, infrastructure and healthcare build," said Bhavik Damodar, a partner at KPMG in India. "These are really positive moves and if implemented well, can create a really positive impact on the economy for years to come."
The government also eased the cap on foreign direct investment in the insurance industry, included measures to help farmers, such as a boost to its rural infrastructure fund, as well as plans for a national monetisation pipeline for brownfield infrastructure assets.
There was a strong emphasis on spending on roads and railways as part of its infrastructure push.
But these measures come at a cost, as the government faces a delicate act in balancing its finances. Economists had projected that India's fiscal deficit would balloon to about 7 per cent of gross domestic product in the current financial year, compared to its target of 3.5 per cent, as the pandemic forced New Delhi to launch stimulus packages to help the country through the Covid-19 crisis.
But the budget released on Monday pegged the fiscal deficit at a much higher than anticipated 9.5 per cent of GDP for the current financial year. This is expected to narrow to 6.8 per cent in the next financial year on improved revenues.
"The budget swings the fiscal bat hard and the fiscal deficit is much higher than the market expected," said Aurodeep Nandi, Nomura's India economist. "The key question is that while the ball is aimed for the boundary line of growth, will it get caught by a negative rating action?"
To help improve its finances, the government unveiled a target of 1.75tn rupees for privatisation and stake sales in state-owned assets. These include an initial public offering of Life Insurance Corporation and plans to divest two public sector banks.
For businesses that had pinned hopes on the budget to propel the economy out of a recession and boost employment the budget plan appears promising.
"The enhanced spending on public infrastructure projects ... is laudable and welcomed by industry," said Niranjan Hiranandani, the national president of real estate industry body Naredco and managing director of Hiranandani Group, a property developer. "It will give impetus to employment generation and attract essential investment to lift up the economic revival."
India's economy was battered by one of the world's strictest Covid-19 lockdowns last year.
In its annual economic report to parliament on Friday, the government projected the economy will contract by 7.7 per cent in the current financial year. It forecasts that the economy will grow 11 per cent in the coming fiscal year, helped by the country's Covid-19 vaccination drive. The government aims to inoculate 300 million citizens by August and expects consumer demand to pick up.
On Monday, IHS Markit PMI data showed India's manufacturing sector got off to a strong start in 2021, with its best improvement in three months. The sector registered a 57.7 reading in January, from 56.4 in December. A figure above 50 represents an expansion.
Despite signs of a pick-up in activity, stimulus from the budget was considered critical to keep the economy on a path to recovery.